Teardown: Metrics You Need To Track For Financial Takeoff
Reading Time: 7 Minutes
You make what you measure.
If you don’t have a constant metric you can monitor, you cannot be disciplined about what you do. Having a concrete target to track helps you prioritize, build momentum, and ultimately makes the whole thing fun.
That means you need to start your journey with a clear definition of what you’ll be measuring and set up the tools you’ll need to be able to readily access that measurement. You should be able to see those measurements at any time on any day.
Financial Cockpit Basics
There are two basic things I think everyone should track. These two are the bare minimum to get you going, but they will take you quite far. These keystone metrics are total net worth and monthly expenses, and I’ve shared my favorite tools to track them below.
Note: I am not receiving any compensation from these companies for my recommendations. These are just the products I think are outstandingly helpful in building wealth.
Net Worth Tools
The first is some measure of your total net worth. You want to be able to see this bad boy regularly. You may even want to make it your homepage or make a scheduled appointment on your calendar to review it every month.
Best Free Service: Personal Capital
One free tool I absolutely love for this is Personal Capital. You can link all your bank, credit card, and brokerage accounts to their platform so you can have a 360 degree view of your holdings at any given time. I was initially leery of sharing such sensitive login info with a third party site, but the site is a legitimate one, backed by numerous reputable funds. They currently track $2.5 billion of assets, serve 1 million users, and were speaking with investment backs about going public in 2015. They monetize the site by trying to upsell wealth advisory services and they will ask you if you want a free 30-minute consultation on how to optimize the management of your portfolio. You are free to decline and keep using the service.
Best Paid Service: Quicken
If the idea of a cloud service isn’t your jam, there’s always Quicken. You can link all your accounts and access them specifically on your computer. Quicken will cost you $40-$105 depending on what version you get. You can download it instantly by purchasing it from their website here.
Expense Tracking Tools
The second tool you need is something to track your expenses. You’ll want to be able to see how much you’re spending by category, how that is trending over time, what merchants you’re spending the most with, that kind of thing.
Best Free Service: Mint
Mint is my go-to choice. Like Personal Capital, you can hook up your accounts by providing your login info. It will automatically download info as far back as each of your providers allows it, so you instantly have at least a few months of history to play with. Mint is owned by Intuit, the same company that owns Quicken, so it is a legitimate company. It is free to use and monetizes through affiliate relationships, where they earn money if you end up purchasing a product they recommend such as a credit card.
Best Paid Service: You Need A Budget
If you’re looking for something even more hands-on, consider You Need A Budget. I also have this product in addition to Mint. It requires a lot more input from you as you hand-enter each transaction as you make it. But that extra labor is actually part of what makes it so valuable. It creates an awareness of when you’re spending and you are forced to see how it’s fitting into your budget (or not) every time you walk up to the cash register. YNAB’s interface allows you to do a whole lot more with your expense info including dynamic edits to your monthly budget. It currently costs $5o/yr and you can find it here.
Note that there is a lot of overlap between the four vendors. All of them basically purport to track both net worth and expenses, but Personal Capital’s net worth and overall cash flow visualization charts and way more powerful than Mint’s, for example. Likewise, Mint’s ability to cut your expense data is much for diverse than the controls and tedium required in Personal Capital. As long as you pick something that works for you and you are using it regularly, it is a successful product.
Advanced Metric Tracking
If you already have your basic tools set up, you get to graduate to the advanced section.
The most effective measurement systems don’t just track one metric. Sure, the end goal for a company is ostensibly to be as profitable in the long term as possible. Tracking the company’s profits is clearly one measure that’s important. But you can break down the factors that go into generating profit – revenue, number of users, number of new customer trials, things like that. You need this deeper layer of subgoals.
Likewise, for retirement your ultimate goal is to get your net worth to a target number. But there are different levers you can pull to get there.
I recommend using the Four Step Blueprint for Retirement as inspiration on what subgoals work for you. Depending on what stage you are in, you will have metrics you track for controlling spending, expanding your income, finding places to grow your nest egg, and optimizing your tax exposure. Depending on what area you are currently wanting to tweak, you can stack your metrics in that area.
- Track how your spending by category has changed over time, and aim to bring a specific bucket lower
- Monitor credit card sign up bonus and rewards percentages to determine if you want to switch cards
- Track spending by merchant and create habits that lead to deliberate rather than impulse spending ( for example, I realized I was spending $300 a month on Amazon and had no idea what I was even buying there – a lot of my purchases were add-ons that ‘seemed useful’ which I instantly cut out once under review)
- Track income from hobbies or a side business
- Look at YoY performance of your strategies and compare to benchmarks like the S&P, bond markets, etc.
- Asses the fees you are paying on your funds and determine whether you can move them to a similar fund with lower cost ratio
Optimizing Tax Footprint:
- Looking at portfolio by account and shifting high growth, high gains holdings to tax-advantaged accounts while leaving the others in taxable accounts
- Tracking total cap gains vs realized losses per year to optimize the year in which to sell certain securities
How Many Metrics To Track
I tend to have about 4-6 metrics I track, with only 3-4 under intense scrutiny at any given time.
The two that never leave the list are overall net worth, and monthly expenses by category shown over a two year time frame. These two always get active attention.
A couple of my metrics rotate depending on what I want to focus on. I might be laser-focused on decreasing the spend in my restaurant category (as I have been doing these past two months) so I will drill down and create more metrics to understand that spend better like spend when out with friends, spend on casual take-out, spend on dinners with just my spouse. This helps me determine where my bad habits lie. Metrics in the Rotating bucket are active works in progress and thus receive intense scrutiny.
This category is mostly for areas that I had been focusing on in my rotating section that just need to be monitored. Using the example of restaurants above, once I build habits that stabilize at the lower level of spend I am happy with, that metric will then stay on the back burner in monitoring for a few months to make sure we’re in smooth sailing and then it will eventually disappear off the list.
What do you track? And how do you do it? Would love to hear your thoughts in the comments section below.